Merrill Lynch’s Irish Bank Rescue Estimate $65bn Short

By Mani
Updated on

Merrill Lynch’s estimation to the Irish government on the capital shortfalls within the banks in 2008 turned out to be a quarter of the eventual bill.

The Irish government paid Merrill Lynch 7.3 million euros over the course of 2008 and 2009 for advice on bailing out the banks.

Completely underestimated

In an interview, Doherty, finance spokesman for Sinn Fein said: “Merrill Lynch completely underestimated the capital shortfalls within the banks, but the whole exercise was rushed after the guarantee. The role of external advisors, including bank auditors, really needs to be looked at as part of the banking inquiry”.

After Merrill Lynch’s estimates, Irish taxpayers have been forced to pledge about 64 billion euros to rescue the nation’s banks after the worst real estate crash in Western Europe. Ireland sought an international bailout in November 2010, as it struggled with the mounting cost of propping up the banks.

Irish government’s guarantee

Ireland was the first European country to watch its entire banking system fail. Unlike the Icelanders, who refused to bail out their bankrupt banks, in September 2008, the Irish government gave a blanket guarantee to all Irish banks, covering all their loans, deposits, bonds and other liabilities.

Within two years, the state bank guarantee had bankrupted Ireland. The international money markets would no longer lend to the Irish government. To avoid collapse, the government had to sign up for an €85 billion bailout from the EU-IMF and enter a four year program of economic austerity, monitored every three months by an EU/IMF team sent to Dublin.

However last November, Ireland announced that it will exit its three-year, 6.75 billion euro bailout program without a line of credit from the European Union and IMF. Analysts point out that Ireland has funded itself into 2015 with timely debt issuance over the past 18 months. Interestingly, about three years ago, Ireland was unable to raise a cent on the bond markets.

Merrill’s erroneous estimates

Merrill Lynch estimated now-defunct Anglo Irish Bank would cost €5.63 billion to rescue, just a fifth of its final cost. Within three years, the state had injected almost €21 billion into the bank, in which it now has a 99.8% stake. However, Merrill Lynch’s €4 billion Bank of Ireland projection was near to its €4.8 billion taxpayer rescue, which has since been recouped by the Government.

The investment bank’s advice was based on increasing banks’ core Tier 1 capital ratio, a measure of financial strength, to 8.5%.

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